In 2014 the EU Commission proposed a number of amendments to the Shareholders Rights Directive. The original Directive was implemented in the UK in 2009 and aimed to improve corporate governance in EU companies traded on regulated markets by enabling shareholders to exercise their voting rights and rights to information across borders.
The 2014 proposed amendments seek to improve shareholder engagement and transparency and include some new obligations on asset managers and institutional investors.
Institutional investors and asset managers should develop a policy on shareholder engagement covering how they:
- integrate shareholder engagement in their investment strategy;
- monitor investee companies, including their environmental and social risks;
- conduct dialogues with investee companies and their stakeholders;
- exercise voting rights; and
- manage actual or potential conflicts of interests, such as the provision of financial services, or companies affiliated to them, to the investee company.
The policy should be made public and sent to the institutional investors’ clients annually. If an institutional investor or asset manager decides not to develop an engagement policy, or decides not to make their policy public, they will need to provide a clear and reasonable explanation.
Institutional investors should annually disclose to the public the following information on their investment strategy:
- how it is aligned with the profile and duration of their liabilities;
- how it contributes to the medium to long-term performance of their assets;
- where they make use of asset managers they should disclose whether the arrangement:
- incentivises the asset manager to align their investment strategy and decisions with the profile and duration of liabilities;
- incentivises the asset manager to make investment decisions based on medium to long-term company performance and to engage with companies;
- evaluates the asset managers performance; and
- the structure of the consideration for the asset management services and the targeted portfolio turnover.
Asset managers should publicly disclose:
- how their investment strategy and its implementation is in accordance with the asset management arrangement;
- how the investment strategy and decisions contribute to medium to long-term performance of the assets of the institutional investor;
- the portfolio turnover;
- whether they make investment decisions on the basis of judgements about medium to long-term performance of the investee company; and
- whether they use proxy advisors for the purpose of their engagement activities.
Asset managers should disclose the following Information direct to the institutional investor:
- the portfolio composition;
- the portfolio turnover costs;
- conflicts of interest which have arisen and how they have been dealt with.
This information allows institutional investors to better monitor asset managers, and provide incentives for a proper alignment of interests and for shareholder engagement.
Timeline for implementation
In March 2017, the European Parliament voted for the revised Shareholders’ rights directive. The final adoption step will take place in the European Council shortly. The directive will enter into force two years after its publication in the official journal.